2020 Year End Recap of Financial Markets

Dear Clients and friends:

Last July, I started off my mid-year letter with the headline “What a half year!” Let’s do a mulligan and repeat that appropriate headline for the second half of 2020!

The pandemic, and its economic impact continued into the Summer, along with the political / social unrest ruled the headlines. The upside to the second half was: Wall Street Did Not Take Notice of Most of This! Stocks gained handily in the last 6 months, the Dow Industrials rose 4,100 points or +15% to close 2020 above Dow 30,000. The stock market has not closed a year at a new all-time high since 2013, so that’s somewhat significant. It ended December making its 14^th record close of the year. The full year 2020 saw the Dow Industrial Stocks rise 10%. The S&P 500 Index and Nasdaq Composite did very well too, both more than 18% higher on the year.

Of the sectors of our economy that benefitted last year, Technology, Industrials, and Consumer Discretionary stocks did the best. Energy, Real Estate and Utilities were the bottom feeders.

The bond market performed rather well also for the year. The massive money-printing by the Federal Reserve for relief and stimulus payments, and the falloff in economic activity has not given them any reason to raise rates with inflation low (+1.4% in 2020), and a weak labor market (our unemployment rate is 6.7%, or 11 million folks looking for work).

With interest rates declining, long-term US Treasury bonds (20+ years) gained +15%, while shorter-term notes and bonds rose 7-10% last year. That’s quite a superb year for bonds, not likely to be repeated this year. Low interest rates are a double-edged sword: Savers must accept lower rates on their savings accounts, bond interest payments, and annuities. But owners of bonds (investors) reap the nice capital appreciation of their notes and bonds. 

Mortgages became much more affordable last year. The 30 year fixed conventional mortgage quoted by Fannie Mae dropped from 3.22% to just 1.91% by year end. This rate of lower financing for home-buyers was partially offset by higher home prices. The average starter-home selling price jumped $28,500 year-over-year, or +12% to $266,500.* So you will be financing a larger mortgage but at a lower rate overall.

William Shakesphere quoted “Neither a lender nor a borrower be, for loan oft loses itself and friend”. Summary: be careful from whom you lend or borrow money.  

Since our Government is a huge borrower of money – a rise in rates will really hurt their “cash flow”. The money to pay interest on their debt could be used for other worthy projects. This is not a good position to be in fiscally. To wit: in 2020 our money supply increased 25%, and $1 of 5 U.S. dollars that exist today were created last year! 

Other categories of bonds – corporate and municipal turned in +5% to +7% total returns last year. If a bond can provide income and keep you ahead of inflation and the tax on the bond interest, then you are net/net ahead. That may not be the case every year, so be aware of that as a bond investor.

Our favorite precious metal, Gold – after a robust +17% gain the first half of 2020, tacked on $120 / ounce more the last half of the year, boosting its total 2020 gain to +$370 an ounce; good enough for a +24% gain. After Gold prices were break-even in 2018, Gold has gained +47% combined in 2019-2020. All investor portfolios own Gold exchange-traded funds to some extent as a hedge against uncertainty (political, economic); which we are surely experiencing today.

What’s possibly in store for 2021?

From my perch, it appears that the stock market has priced in a lot of good news that may or may not come to fruition this year. The pandemic response and vaccination success, getting workers back in a job, opening our schools, getting back to our routine lives, to name just a few.  

Many questions will be answered soon with the policies of the new (and majority) administration of Democratic leadership in both houses of Congress and the White House.

• Can both parties agree on more legislation to help American’s?
• Taxes won’t be going down for most of us in 2021, and maybe way up for some. Income, Estate, Sales and Use taxes. Will you be affected?
  
• Inflation may well start to rise above the Fed’s 2% target.
  
• Higher interest rates may be needed to calm the increased prosperity if we do go back quickly to a “new normal”. Will than stun our growth too soon?
  
•  Will Government spending spiral even more out of control, without a meaningful increase in revenues?
• Will the stock market, the source of many American's wealth and retirement savings be eroded by falling prices / higher inflation?
  

We are content to keep advocating a balanced and diversified portfolio. One that can hold up and deliver positive results in most years under the four economic conditions of Prosperity, Recession, Inflation, and Deflation. We are anticipatory in this business and also reactionary to avoiding large losses.  

Do reach out to me if you have questions or need advice.
                                                

 (954) 719-1151

 

 

 

* National Association of Realtors data; 3Q-2019 to 3Q-2020.